Wealth building for millennials: It’s not too late to start

Millennials have been dubbed "the lost generation" because of how far behind they are on building wealth compared to older generations at this stage of their lives. The Federal Reserve Bank of St. Louis reported that millennials (especially those born in the 1980s) would accumulate less wealth during their lives overall.

These predictions come at the heels of the collective experience of unfavorable macroeconomic trends and economic instability that the generation has faced. It's safe to say that millennials, who fall between the ages of 26 and 40, have had far from smooth sailing when it comes to building wealth. 

A sizeable chunk of millennials graduated college at the start of the 2008 financial crisis and bore the brunt of an economic meltdown right when they were entering the job market. The last decade has seen a widening wealth gap, with the younger generations clustering at the bottom. Many things can be blamed for the rise of inequality: Student loan debt burdens, increased cost of living, high housing costs and stagnant wages. Now largely indebted and delayed in building their careers, being a millennial is almost synonymous with having money anxiety. 

The economic fallout of the Covid-19 pandemic has again presented many millennials with more financial difficulties and introduced another type of crisis — a growing collective discontent leading to what many are calling the 'Great Resignation.' These events threaten to push this generation permanently off course when it comes to building wealth. 

But there's still time to catch up. Millennials had gradually started to recover from the decade-long struggle following the 2008 economic crisis. As early as 2018, research by the Pew Research Center showed that working adults in this generation earned more than young adult households did in the past 50 years. A reason for this growth in household earnings was that millennial women were working more, and being paid more, than women in previous years.

Though millennials have faced another setback, largely due to the economic fallout of the Covid-19 pandemic, if previous recoveries are any indication, they can catch up again.  

Regardless of the setbacks, wealth building and having enough retirement savings is not elusive for  millennials. Reports have already started to show that older millennials are some of the top spenders in the economy and are on track to accumulate significant wealth. But what is wealth and how does it play into the financial security of an individual? Put simply, wealth (or net worth) is the total value of the assets (i.e. real estate, cash, stocks, etc.) owned by a person, minus any debts or liabilities (i.e. student loans, mortgage, etc.). Wealth helps determines your quality of life now and after you retire. And it usually takes a long time to build.

For younger generations, after subtracting expenses like rent and student loan payments, there is very little income, if any at all, left aside to save or invest. But not all hope is lost. Even with little disposable cash, there are still ways millennials can start to build wealth and plan for a sustainable retirement.

Take advantage of the power of compounding

Younger people have one huge advantage on their side: time. With this, they can harness the power of compounding.

The basic formula for compound interest is the addition of interest on the principal sum plus any interest already earned on it. For example, say you put $1,000 in a bank account paying a 5% annual interest rate, at the end of the year your $1,000 becomes $1,050. $1,050 at 5% yields $1,103, which at 5% yields $1,158. So after 3 years, you turn $1,000 to $1,158 just by letting it sit and compound.

By putting your money in an account that compounds, you make your money work for you. This is just an example, as you're going to have a hard time finding a bank that'll pay you a 5% interest rate, but if you invest it in the market you could see higher returns. However, the idea is to start small and make your money grow over time. 

High-yield savings accounts offer higher interest rates than traditional saving and checking accounts. The concept of compound interest also works with investments too.

Exchange-traded funds as a wealth-building tool

For those who want to invest but have no idea where to start, it's still possible to start building wealth using exchange-traded funds. An Exchange-Traded Fund (ETF), similar to an index fund, is a compilation of a series of stocks and/or bonds and is an investment tool that lets you invest in the market as a whole.

When you buy an ETF you're often buying a cluster of major companies. For instance, you could buy an ETF that tracks the S&P 500. If you put $100 a month (or more if you can afford it) in an ETF and don't touch it, then $100 a month is $1,200 a year, which starts to become more tangible.

Plus, over time, the value of the ETFs themselves will grow, especially ones that track the overall stock market. The market goes up and down, but it's upward moving over the long term. For example, the S&P 500 has historically generated nearly a 10% average annual return over the years (just remember that future returns are not guaranteed).

The Schwab brokerage account allows your to buy and sell ETFs and stocks commission-free, including funds that track the S&P 500.

Robo-advisors, like Wealthfront and Betterment, can help you build wealth with a hands-off approach. They'll create a portfolio of low-cost ETFs and index funds based on your risk tolerance, investment goals and time horizon. Plus, robo-advisors will rebalance your portfolio over time based on your goals and market conditions. And if you're looking to build wealth for retirement, both Wealthfront and Betterment offer traditional and Roth IRAs.

Gallup reports that more than 36% of the U.S. workforce, around 57.3 million people, participate in the gig economy, and millennials make up the largest chunk of gig workers (42% in 2020). As more millennials value their autonomy, and traditional full-time jobs with benefits become harder to come by, the gig economy is expected to continue to grow.

There are many advantages of being a freelancer, but it also comes with its drawbacks, some being the fickle nature of your income source and the lack of benefits like a 401(k) and health insurance. There's less financial security for freelancers and gig economy workers. 

For a chance at wealth building, freelancers need to not just work for themselves, but also build a business. Many freelancers are "solopreneurs" living from invoice to invoice

Heather Purcell, a financial management expert who works with creative firms, expresses her concern. "I work with business owners who do business with many freelancers on a regular basis and receive invoices for work done from these individual contractors. What I've noticed is that none of these freelancers work to build a lasting business that can be run independent of them and their time. What happens when you don't want to sell your time anymore? Where does the money come from after you retire?"  

She advises that freelancers focus on building businesses that can create a more financially stable future, even if it means getting paid less now. "I have one millennial client who's thinking ahead and building a business. They get paid less in the short term so they can pay employees and create systems that can run independently of them."

Taking a pay cut now and reinvesting that money into your business, or into an investment account, can help you build wealth in the long run. The money is good if you're a successful freelancer or independent contractor, but it provides a mirage effect of worth that is not sustained when you retire. Millennials need to think long-term and create systems and businesses that can function independently of them.

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